Warrants
From Financial Literacy Wiki
Warrants has similar characteristics as options in United States. A warrant is a powerful investment tool that enables one to gain exposure to a security for a fraction of its price. Warrants can be used to either increase or decrease your level of risk and it also allows one to profit from predicting the correct direction on the price of the underlying security.But one has to take note, unlike stocks, warrants have a lifespan.
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Warrants in Singapore
Warrants was first introduce in Singapore in 1989 but interest was not sustainable. The second launch took place in 1998 again interest only lasted for 18 months, because the sharp decline in the stock market in 2001 caused a lot of warrants to expire worthless. In 2003, when SGX relax the rules for warrant issuers, the warrant market starts to pick up very quickly. In 2005, the turnover of warrant trading reached SGD$10.6 billion compared to 2004 turnover of SGD$1.4 billion.
How Warrants Work
There are basically two types of warrants and they call warrants and the put warrants. Call warrants give the holder the right, but not obligated, to buy a certain underlying security for an agreed upon price (known as the Exercise Price or Strike Price) at date of expiry. Put warrants give the holder the right, but not obligated, to sell a certain underlying security for an agreed upon price upon date of expiry and the seller of the warrant has the obligation to honor the terms of the warrant.
Styles of Exercising Warrants
There are two styles of exercise for warrants - American and European.
An American style warrant allows holders to exercise their warrants at any time up to and including their expiry date thus lowering the risk of the holder. European style warrants allow conversion only on the expiry date.
Investors should also note the exercise amount of a warrant, known as the conversion ratio. This is important in determining the quantity of warrants needed to be exercised to buy or sell one underlying share.
Warrants may be Cash Settled. They are usually European in style (that is they may not be exercised prior to expiry) and investors are given a cash amount equivalent to the amount the warrant expired "in-the-money." If for example, a given warrant had a exercise price of $1.00 and the stock price at expiry was $1.40 then the investor would receive $0.40 per warrant (assuming the exercise amount was one warrant needed for one underlying share).
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